In the last post, I detailed the story of a New York racer who lost in U.S. Tax Court. Today, I’ll fill you in on the case of a California racer who won his tax case in 1968, and list some factors the court used in making its decision.
Lincoln Bolt graduated with a degree in electrical engineering in 1959 and became employed full-time in that capacity. Beginning in 1960, the taxpayer began reading about auto racing and, taking his financial condition into account, decided to race in the “midget” class.
His first car never ran and he sold it for $25. From 1960 to 1965 he owned various midget and sprint cars, as well as an engine. He sought mechanical assistance but had little luck in the beginning. His racing luck was no better.
He devoted most of his weekends and evenings to his car, which he purchased in 1961, and finally found a professional mechanic named Henderson. Bolt was able to drive the car, beginning in 1962, and continued through 1967. Bolt’s arrangement with Henderson was that the mechanic would provide the services in return for having his name appear on the vehicle. Bolt paid for all parts.
Bolt’s apartment became cluttered with auto parts, (evidently much to the dismay of his roommate) and Bolt told his friends that he eventually wanted to make a profit in the sport. He said he envied professional racing drivers and wanted to eventually reach the same position that they were in. He joined various racing associations.
Mr. Bolt never participated in an event that did not have a purse. He performed calculations regarding future winnings, assuming he would place in the top three positions at the end of a race. Although he raced in a number of events, his car would usually suffer a breakdown.
His record of winnings was $50, $94, $10 and zero in 1963 through 1966 respectively. In 1964 and 1965, his expenses totaled $3,475 and $3,262 respectively.
The IRS audited Bolt’s tax returns for 1964 and 1965 and proposed an assessment based on disallowing Bolt’s racing expenses for these years because Bolt had “not established that you are entitled to such a deduction,” according to the IRS notice.
Bolt disagreed and went to U.S. Tax Court, where he represented himself. Both the mechanic and the roommate testified for Bolt. The mechanic stated that Bolt’s ability was such that he could have won many races had the car functioned properly.
The court ruled in Bolt’s favor because:
· The testimony of witnesses indicated that taxpayer had a profit motive.
· Bolt spent a good deal of time doing research.
· He spent a large share of his income on racing.
· He entered a large number of racing events.
· He sought driving opportunities with other owners.
· He shared ownership of his cars with others.
The moral of the story: you need to run your racing activity like a business. Make sure you spend the time, money, hire the talent, and spread the word that you’re in it seriously. Just as important, it’s vital to keep all records and projections. (It also helps to have witnesses who can vouch for you.)
Until next time...Phil Schurrer
Contact me at: phil.schurrer.racingprof@gmail.com
(The legal citation for this case is: Bolt, 50 TC, 1007)
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